Year of hope, promise veers badly off course for GM

After a U.S. House hearing into the handling of a recall for faulty ignition switches, GM CEO Mary Barra last week faced more pointed questions from the media. At right is Mark Reuss, GM's global product development chief.

DETROIT -- Days after taking the top job at General Motors in mid-January, Mary Barra insisted there would be "no right or left turns" in the resurgent automaker's path.

Instead, it has been a U-turn.

GM's recall crisis has delivered a swift and dramatic jolt to a company that was in celebration mode just a few months ago. This year was to mark the end of the Government Motors era and the start of a new one, amid admiration for Barra as the first female CEO of a global automaker. A recent string of hit products and accolades for vehicle quality promised to help polish Chevrolet and Cadillac. Barra's new executive team vowed to continue remaking GM as a more nimble, less bureaucratic place.

But two days of blistering hearings before lawmakers last week, which included allegations of criminal misconduct and admonishments over Old GM culture, were a sobering reminder of how far off course GM's year has gone.

Now lying in GM's path are several challenges that threaten to sap the company's resources, hurt its reputation and distract Barra's new management team:

 The recall of 7 million cars globally in just the first three months of 2014 is equal to GM's total of the past four years combined. The prospect of more recalls looms as Barra promises more vigilance on safety.

 GM last week called in disaster-response lawyer Kenneth Feinberg to assess possible victim compensation, which threatens to keep in the headlines stories of young people killed in Chevy Cobalts and Saturn Ions with faulty ignition switches, which are linked to 13 deaths.

 A steady stream of unanswered questions and allegations of a criminal cover-up are likely to continue flowing from various government probes, including GM's responses last week to a battery of questions from regulators. Barra frustrated lawmakers by declining to answer specific questions until a GM-commissioned investigation is complete. That's likely to earn her a trip back to Washington once she has answers -- which she said still could be two months away.

Ominous drumbeat

GM's redoubled focus on safety has led to an avalanche of recalls on everything from the mid-2000s small cars to its bread-and-butter 2014 pickups and 2015 SUVs. In March alone, it announced seven fresh recalls covering nearly 4.4 million vehicles and expanded the recall for the faulty ignition switch a second time, to 2.6 million cars globally.

While that new rigor on safety should be healthy in the long run, for now the drumbeat of recall news has rattled dealers, investors and customers.

"We're dealing with angry customers daily," says Jason Hachmeister, co-owner of Sterling Chevrolet in Sterling, Ill. He says chatter among his customers about the recall "heated up" after the congressional hearings last week, while more concerned Cobalt owners pulled into his service lane to exchange their keys for loaners.

Hachmeister says he's so far not worried about the damage that the recall crisis might do to GM's reputation. Some analysts point out that Toyota suffered only a short-term hit to its image and market share after the recall of millions of cars after incidents of unintended acceleration in 2009 and 2010.

But Toyota's crisis came as the automaker was the industry darling on quality. GM's, meanwhile, came before enough of the buying public was aware of its transformed vehicle lineup and improving quality metrics. Consumers might have read a glowing review of the Chevy Impala, but can they now trust that the company is being run differently from the one that made "crappy cars" for so long, as Barra herself has said, and tumbled into bankruptcy?

"The biggest risk I see here is that the longer it lingers, the more it could potentially keep people away from GM showrooms and impact their market share," says RBC Capital Markets analyst Joseph Spak.

In a hearing that was blistering at times, Sen. Barbara Boxer, D-Calif., criticized GM CEO Mary Barra for representing "the culture of the status quo."

'Core values'

That could be why Barra, 52, is trying so hard to inoculate today's company from the actions of prebankruptcy GM. More than a dozen times during the hearings, she expressed disapproval for decisions made by engineers a decade ago and insisted that "today's GM" is better.

"We've moved from a cost culture after the bankruptcy to a customer culture," Barra told members of the House Energy and Commerce Committee's oversight panel. She explained that, at times, critical information from one part of the sprawling company might not have made its way to another, a problem she says GM has worked to fix.

During her appearance the next day before the Senate Commerce Committee's consumer protection panel, Barra used several corporate slogans to convince members that GM's "core values" have changed, including "relationship matters" and "individual excellence."

But the response from panel members hints at how heavy the lifting will be to rebuild the New GM's image amid the recall debacle. Some asked for a copy of GM's new values to compare with the old ones. A few even challenged Barra personally on whether the 33-year GM veteran has what it takes to transform the culture.

"I am very disappointed, really as a woman to woman, because the culture you're representing here today is the culture of the status quo," Sen. Barbara Boxer, D-Calif., told the CEO.

Prosecutorial zeal

For most of GM's 220,000 employees across the globe, business will proceed as usual. Commercials will continue to roll. Designers will continue to shape future models. But for Barra and her executive team, the recall will continue to distract from the brand-building and silo-breaking that her team had been setting out to do.

In a sign of the mounting pressure on Barra and her team, GM last week hired crisis communications specialist Jeff Eller to help steer the company's response to the recall. Eller was director of media affairs in the Clinton White House and represented Bridgestone/Firestone Inc. in its 2000 tire recall.

Barra promised to return to Capitol Hill to brief lawmakers on the findings of the GM investigation being handled by former U.S. Attorney Anton Valukas. Panel members also raised the prospect of summoning GM engineers and past executives to find out what they might have known about the ignition-switch problem.

The zeal with which many of the Senate members -- a few of them former prosecutors -- raised the prospect of criminal charges against GM was one of the most striking aspects of last week's hearings. Sen. Kelly Ayotte, R-N.H., said she believes a 2006 redesign of the faulty ignition switch that was done discreetly without a new part number assigned amounts to "criminal deception."

The ominous talk comes just weeks after Toyota agreed to pay $1.2 billion to settle claims by the Department of Justice that it suppressed what it knew about safety flaws. Prosecutors have said that case will become the standard for future cases in which automakers hide safety problems.

GM CEO Mary Barra at the State of the Union address in January.

Photo credit: Bloomberg

'Where's my share?'

The specter of criminal prosecution goes beyond GM's reputational risk to threaten what the company calls its "fortress" balance sheet that the company has carefully erected since its 2009 bankruptcy. With $29 billion in cash and securities on hand, GM could fairly easily withstand a fine the size of Toyota's. But GM's exposure might not end there.

Barclays Capital analyst Brian Johnson estimates the cost of setting up a trust for plaintiffs of $1.5 billion. He figures the all-in cost of the recall could hit $3.5 billion, including the $750 million charge that GM expects to record when it posts first-quarter earnings on April 24.

Mike Ward, an automotive analyst at brokerage firm Sterne Agee, believes that establishing a fund for prebankruptcy victims would "open a big can of worms."

"It sounds cold, but the reality is that if I'm a debt holder who lost out in bankruptcy, the first thing I'm going to say is 'That's great. Now where's my share?'" Ward says.

As if these risks weren't enough of a distraction for a CEO just three months into her job, Sen. Claire McCaskill, D-Mo., left Barra with this to reflect on during her flight home to Detroit.

"This is an incredibly important moment in your corporate history," McCaskill said. "You're in charge."